Russia: Overview

RENTAL YIELDS

Moscow yields no longer high

Property prices continue to rise very rapidly in Moscow, while rents are rising at a slower pace. This has led to a decline in gross rental returns (yields). Moscow now has moderate yields, with an average of 5.18%. Buying prices for large used apartments (250 sq. m.) in key central areas of Moscow average US$20,506 per square metre (sq. m), while the average for all sizes is US$16,446 per sq. m. High quality new apartments can, of course, fetch considerably more.

In St. Petersburg the situation is very different. Apartment prices in St. Petersburg have also risen very rapidly, and city-centre apartments in key areas now sell at an average of US$3,490 per sq. m. But St. Petersburg rentals have more than kept pace. Gross rental returns (yields) in St. Petersburg have therefore risen this year, in sharp contrast to Moscow, to 9.6%, from 7.1% last year.

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TAXES AND COSTS

High, flat taxes for non-residents

Rental Income: Rental income for non-residents is taxed at the flat rate of 30%. The rental income of foreign legal entities without a permanent establishment in Russia is subject to withholding tax, levied on gross rentals at 20%. Lease of land as well as property is subject to 18% Value Added Tax (VAT).

Capital Gains: Capital gains earned by nonresidents for selling Russian property within three years of acquisition are taxed at a flat rate of 30%. For Russian property held for more than three years, the entire capital gain is tax-exempt.

Inheritance: Since January 1, 2006, there has been no inheritance tax.

Residents: Residents are taxed on their worldwide income at a flat rate of 13% with numerous deductions available.

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BUYING GUIDE

Buying costs in Russia are among the highest in Europe

According to Global Property Guide research, total roundtrip costs are between 20% and 25.5% of the property value, among the highest in Europe. Bulk of the cost goes to VAT at 18%. Brokerage fees amount to 2% for properties more than US$2 million, otherwise the fee is 5%. The buyer should be cautious when buying unfinished units.

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LANDLORD AND TENANT

Pro-tenant rental market in Russia

Russia’s rental market is pro-tenant.

Rents: Rent is by agreement between the parties. However, rents can only be adjusted after one year.

Tenant Security: The tenant can only be evicted after non-payment of rent for six months. However, the tenant is given up to a year to amend the violation. The tenant can also cancel the contract anytime simply by giving a three months’ notice.

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ECONOMIC GROWTH

Reclaiming the superpower status

Russia is the largest country in the world in terms of land area, larger than the rest of Europe and USA combined. The population of 141.5 million is the sixth largest in the world. It is the heir and to the former Soviet Union. After the union collapsed in 1991, Russia lost much of its international influence as a superpower; although, most of the former Soviet republics still look up to Russia as a big brother.

With the collapse and the 1998 Russian economic crisis, real GDP per capita fell by about 30% from 1992 to 1998. Recovery started in 1999, with a GDP growth rate of 6.3% followed by a 10% growth in 2000. GDP per capita has since recovered to around US$6,330 in 2006.

Russia’s economy is rapidly growing. Demand for commodities such as metals, natural gas, and oil produced by Russia is fuelling this growth. Russia is now home to 33 billionaires including 7 newcomers who join the list according to Forbes magazine. As the new oligarchs search for places to park their money, the real estate market is one of the favorites.

The growth of real income is remarkable, rising by around 9.0% in 2006, 9.1% in 2005, 9% in 2004 and 14.9% in 2003. Real wages are expected to increase by another 9.2% in 2006. Figures on foreign direct investments and investment in fixed assets are likewise impressive.

Inflation is a worry at 9.5%. So too is the increasing assertion of control over the economy by the government, which for instance has taken steps to reassert control over the oil and gas sectors. The Russian state now has a stake of over 50% in the giant gas company Gazprom, which supplies about a quarter of Europe's gas needs.

The entire economy is being structured by President Putin as an interconnected network of government-linked crony firms, which does not portent well for future growth.